Turbulence still rocking United

Analysts fear weather, labor issues will hurt earnings

CHICAGO (CBS.MW) -- In Terminal 1 at O’Hare International Airport, thousands of United Airlines passengers are camped out on rows of open cots, sleeping off the anger and frustration that’s accumulating much faster than their air miles.

Since Saturday, the world’s largest airlines has been canceling flights at the rate of one every 6 minutes, or an average of 231 per day, as it struggles to balance the number of planes, pilots and passengers it can keep in the air.

Though travelers were caught off guard with the massive cancellations, analysts weren’t. United warned in its third-quarter outlook last month that continuing talks with pilots would likely lead to cancellations – including the September schedule – and guided analysts to reduce their earnings expectations.

Based on its calculations, United projected earnings per share for the third quarter in the $2.60 to $3.20 range, and in the $8.25 to $9.75 range for the fiscal year.

According to First Call Corp., the consensus of 11 analysts covering the company is for EPS to reach $3.18 in the third quarter and $9.69 for the year.

At that rate, analysts fear earnings at corporate parent UAL Corp. (UAL) will fall below even the most pessimistic estimates, most of which were revised downward barely three weeks ago.

What’s more, some think that havoc caused by labor issues, among other things, could let the air out of the $11.6 billion acquisition of US Airways Inc., announced in May.

And on Tuesday, Colorado Congresswoman Diana DeGette urged the U.S Department of Transportation to investigate United’s flight delays and called for the government to intervene to help the situation.

Many analysts, however, are sitting out the month before making any more changes to earnings estimates.

“I want to wait and see how long the situation goes on,” said ING Barings analyst Ray Neidl. “I don’t know how long the weather is going to last this way or how long the pilots and mechanics are going to hurt their investments.”

If there were a three-edged sword, it would be firmly planted in the backside of United Airlines. It is facing a horrid combination of stormy weather, in fact far wetter than even the soggiest of expectations; contract-antsy pilots and mechanics; and an incredibly busy travel season that is putting air traffic control in a pressure cooker.

On Tuesday, the triple threat forced United to cancel flights for the fourth consecutive day with expectations of more groundings ahead. The 125 flights cut came in the wake of last weekend’s 700 slashings and another 125 flights chopped out Monday.

And the turbulence isn’t over yet. Ongoing contract negotiations are keeping pilots from working overtime and even making some of them sick. The airlines told analysts that there were an unusually heavy number of sick calls last weekend.

To combat the problems, United said it was taking 1,980 flights out of its September schedule, and another 1,944 flights off October’s.

“We are anguished by the pain and suffering these operational difficulties are causing to our customers and our front line employees,” United president Rono Dutta said in a public mea culpa Monday.

In an interview with the Chicago Sun-Times, Dutta added, “We are going through anguish and shame on behalf of our company. It is wrong that innocent victims are being used as a tool in the resolution of our dispute.”

United is telling analysts it expects to have contract negotiations with the pilots settled by Labor Day. United’s 10,500 pilots have been without a contract since April, when the pact that was inked in 1995 expired. Most analysts, however, don’t expect any concrete agreements will be in place before the end of September.

Among the talking points is United’s proposed merger with US Airways. US Airways has 4,500 fewer pilots, but a greater percentage of them have higher seniority.

Seniority, gained by years on the job, is important. It offers pilots higher pay and better working hours on the most desirable flights driving the top-of-the-line jets.

In a merger, many of US Airways pilots would bump United’s senior pilots out, in effect demoting them. What’s worse, their salaries, which are directly determined by the type of aircraft they fly and the captain or first officer status they hold, would get cut too.

If United chose not to demote pilots, it would significantly dilute US Airways’ pilots seniority.

“Either way, the risk of significant dissatisfaction among the combined pilot ranks is almost inevitable,” Donaldson Lufkin & Jenrette analyst James Higgins said after the merger announcement.

No matter what happens, however, the pilots may not be the labor issue that hurts earnings, Higgins said Tuesday. The mechanics are waiting to rewrite their contracts too.

“The next question is how long will it take with their mechanics,” Higgins said. “They’re starting to show some signs of acting up,” he said, referring to reports that mechanics are grounding planes for any numbers of reasons that are not necessarily safety-related.

“There’s the possibility things will get fixed with the pilots and then the mechanics will be creating problems,” Higgins said. (Flight attendants won’t be in contract talks for another two years.)

Regulators will be watching the outcome closely as they scrutinize the merger and its anti-trust implications.

“They may be thinking that these (labor issues) may be magnified if a larger airline becomes even larger,” Neidl said.

Then there’s the long-term image of and confidence in the airline. Dutta has said he is on the phone every day talking to his biggest corporate customer CEOs. But he’s not hanging out in O’Hare, assuring the maddening crowds.

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